Make Your Money Work for You

A solid money-management plan will help you navigate real estate’s unpredictable revenue streams.

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When she jumped into real estate a decade ago, Amy Karegeannes of Racine, Wis., made a lot of plans for her new income. “You get that first check, and you’re so excited, and it seems like a lot of money,” she recalls. Karegeannes began dividing her commissions into various pots—from the serious (private school tuition for her three children) to the frivolous (a fancy new purse at Nordstrom). But she forgot to set aside money for one critically important account: the Internal Revenue Service. “My first year in real estate, I didn’t put any money aside for taxes,” she says.

Money doesn’t guarantee happiness, but the ability to manage what you have can provide a windfall of security during uncertain times. This collection of articles will put you on a path toward greater financial control:

Karegeannes mistakenly assumed that her husband upping the withholding from his salaried paycheck would be sufficient to cover any taxes she owed. “It was a really bad assumption,” she says ruefully. By the end of that first year, Karegeannes owed $10,000 in taxes. “When I found out, I felt like I’d been punched in the stomach,” she says. “We had to be put on a payment plan with the IRS. That’s not a position anyone wants to be in. We paid it off, but it was a hard lesson to learn.”

Her major misstep, she says, looking back from a position of greater financial security, was not thinking of the money as business income. “It isn’t my money. It’s my business’s money,” Karegeannes says. “It’s not personal income, and it needs to be allocated appropriately. As real estate professionals, we are small-business owners. Even though I’m with Shorewest, Realtors®, essentially I am running my own real estate business.”

The U.S. Small Business Administration recommends that small-business owners, including independent contractors, create and live by a solid financial plan, whether they’re just starting out or have been in business for years. “A business plan that lays out all your projected expenses and projected revenues allows you to adjust as things get better or worse,” says Dennis Melton, district director of the SBA in St. Louis.

“Real estate is the kind of business where you can have a huge paycheck one month, nothing the second, and a middling check the third,” says Bob Newman, also with the St. Louis office of the SBA. “Having that plan will keep you honest with yourself so you can recognize a problem before it overwhelms you. If you are drifting away, you can more easily correct course.”

A good financial plan is partly strategic and partly tactical, says C.A. Hebda, a New Jersey consultant who helps companies develop long-range strategic plans. It doesn’t have to be long; in fact, bullet points are okay. The strategic portion of the plan should look ahead five to 10 years and should focus on the segment of the market being targeted. “It is not going to have a lot of detail,” Hebda says. But it does require research about what portion of that market is available to you based on your skills, experience, and knowledge. “You [also] must have some sense of the competitors in that market,” she says. “Who are the true competitors?”

The tactical section of a good business plan includes a more detailed quarter-by-quarter plan for the first year. It should be reviewed quarterly, or more frequently if things aren’t going well. (Read more about budgeting here.) The most common mistakes made by independent contractors include not being realistic and failing to develop solid contingency plans, Hebda says. “A lot of people focus on wishful thinking instead of reality. You need to examine the data. Know your market.” That means asking questions such as: What’s selling? What’s stalling? How will either scenario affect my business? “If the bottom drops out of the $2 million–plus market, how many $500,000 houses will I be able to sell?” she asks. It’s also critical to consider how changes in government policies, such as increasing interest rates or new tax rules, could affect your business.

A solid business plan makes life easier. “It gives you a touchstone,” Hebda says. “If your work life is moving on a stable track, if you are anticipating problems and reconciling them before they overwhelm you, it makes your family life more stable, too.”

Find an Advocate

Successful businesses benefit from strong financial advocates such as accountants and certified financial planners, says Jim Schleif, ABR, CRS, with Shorewest, Realtors®, in Shorewood, Wis. “I think it is very important to have those key partners,” he says. Schleif graduated from college with a pile of credit card debt that took him seven years to pay off. “I realized I needed a financial plan so I didn’t have to eat cat food when I was 70,” he says.

Schleif debated for two years before making the decision to switch careers from nonprofit management to real estate. The first thing he did was to stash away eight months of living expenses. “I put cash in the bank before I did anything else,” he says. Rather than constricting him, having a plan and a budget actually gives him “flexibility and the latitude to do all the things I enjoy.”

Mary Hutchison, ABR, SRES, of Better Homes and Gardens Real Estate–Kansas City Homes, couldn’t agree more. “It can be very tempting, after two or three months without a paycheck, to feel like, I deserve to spend this after being deprived,” she says. “It’s important to have a plan so that you can fulfill your goal of having your money work for you.”

When she left a corporate job for real estate in 2003, “we went from two regular incomes to one regular income and one uncertain income,” Hutchison says. “My husband and I had to sit down as a couple and determine how we were going to handle things like buying office supplies and me not having two weeks’ paid vacation.” Right off the top of her commission checks, Hutchison puts 35 percent away for taxes and another 10 percent into savings.

A good rule of thumb is to have between three to six months’ operating expenses in an easy-to-access emergency fund.

On the advice of her accountant, Karegeannes also now puts aside a significant amount of each commission check—30 percent for taxes, 20 percent for savings, and 50 percent for the family’s general operating fund. “I always put money aside for marketing and business expenses,” she adds. She also keeps her business accounts separate from her personal accounts, as do Hutchison and Schleif. “If I don’t see it, I’m not tempted to spend it,” Hutchison says.

But her budget also anticipates the odd luxury item. “It’s in the plan,” Hutchison says. “I usually set aside $100 or so from every commission check for my secret stash. That way, if I feel like I need a little splurge, I have the money and I don’t have to feel guilty. I think that’s so important.”

Watch Credit Card Use

Another risk factor is an overreliance on credit cards. “Credit card debt is an albatross,” says Schleif.

The SBA calls it “future sacrifice.” The SBA’s Melton says amassing business debt using credit cards is a losing proposition. “Interest rates are much higher [than for a traditional bank loan], and if you miss a payment or are late, you can see those already high interest rates double or even triple,” he says. “You just can’t get ahead if you are using credit cards to stay afloat,” adds Schleif.

Karegeannes says she strives to “be smart financially on the front end.” That means never depending on future earnings to patch holes in her budget. “As tempting as it is to think, ‘I can make that up next month,’ don’t do it,” she says. “If you’re thinking that way, you are setting yourself up for a financial crisis.”

Never spend your commission check before it arrives, Schleif concurs. “A lot of people are spending it in advance, and that changes how you approach your business,” he says. “Instead of working for the client, you are working because you have to have the money. Put the clients’ needs first and success will follow, and that’s the key to financial stability.”

When she has a lean month or two, Karegeannes cuts out the extras, such as restaurant meals, Starbucks coffee, and department store purchases. “Cutting out those small things really goes a long way to saving money,” she says. “And, you can turn what might have been a negative into a positive: eating more meals as a family at home around the dinner table.”

It’s never too late to start on a business plan. If income is decreasing or you’re in a hole, start small. A business plan can be just a one-page list of a few categories. But it should be a definite guide against which you can measure yourself. “Literally force yourself to accomplish certain things on specific days,” Hebda says. “When times are tough, any accomplishment should be celebrated, even if you look back later and think, that wasn’t so significant.”

When Hutchison had the worst year of her career, in 2010, she and her family also faced cutbacks in their discretionary spending. “But when you have a plan, and [therefore] savings, you don’t feel like you’re drowning,” she says. “For a while I started a side business, thinking maybe I could earn extra money that way. But I realized that the side business was taking too much time and money away from my [primary] business, so I moved on.”

Instead, she focused on bringing in more clients and more business. “If it looks like it’s going to be a bad year, you have to hustle more,” Hutchison says. “You get out there and bust your butt to get more business.”

“It’s hard to judge who will be successful,” says Melton. “But one thing we’ve noticed that all successful business owners have in common is a passion for their business. People who have that passion always seem to find a way to make it work. They are out there hustling, out beating the bushes, and finding ways to make their business go.”

Maggie Sieger is an award-winning journalist whose work has been featured by news organizations including TIME Magazine, Reuters, Entertainment Weekly, and the Chicago Tribune. See more of her work at testing-beacon.herokuapp.com/maggie-sieger or follow her on Twitter @MaggieSieger.